The article then talks about the Causes and consequences of inflation; inflation is caused by the rise in aggregate demand through a rise in government spending or through Consumer spending. Prices are raised when there is excess demand in a market; this price rise is called demand-pull inflation. The demand-pull inflation process is explained through figure 2. Where there is excess demand firms increase their labour force to increase their supply. The extra wages means price increases which leads to wage spiral as increases in wages means that price increases again. Then powerful trade unions win large wage rises and it goes on.
Other consequences of high inflation are that the Exchange rate for the sterling pound will depreciate. This would lead to imports becoming expensive then Exports. The article then explains that the governments counter inflationary policy was to keep the a high exchange rate this way imports become cheaper and the British Producers can be “pressured” into keeping their prices down.
Finally the article argues why it took so long for the government to reduce the rate of inflation. If inflation was too low then there were worries of high unemployment as low prices meant low sales revenue thus Labour force could not be extended. And if The Government calculated that there was a deficit of too much spending over tax revenue then it would mean higher taxes which intern would rate aggregate demand thus rising inflation. The article then talks about the first target rate of inflation being introduced in 1992 and the bank of England
Summary of Article 2
“Economic Outlook 2002”
This article begins with explaining that although the world economy is down due the September 11th terrorist attacks the UK economy can be classed as robust. The GDP growth was at 2.3% last year, which was aided by the low interest rates in the wake of the US slowdown.9
It then explains how the manufacturing sector is experiencing recession. The latest figures indicate that a 5% year-on-year contraction in output. This in turn may lead the export markets to contract, as production for manufactured good would be low.
It then talks about the headline rate of inflation has risen by 0.9% in November and the PRIX rate of inflation rose by 1.8%.
The article then talks about the unemployment rate being at 3.2%, which rose last year by 0.1% over the past quarter, and the ILO measure of unemployment has rise by 0.1% to 5.1%.
Due to the September 11th attacks, the article then questions consumer confidence whether it is high or not. It argues that some consumers may be scared to go on holiday or reduced the amount spent or on the other hand to cheer themselves up go on spending sprees. It seem that the MPC has to decide whether to reduce interest rates or to increase fiscal activity.
To conclude the article talks about growth saying that the EU and the US are likely to grow by 1% and if the US do not and stay in recession throughout 2002 there would be negative implications for the exchange rate for the dollar. It would seem that dollar would depreciate in value and the euro would gain in value. For the sterling it would mean downwards pressure if the euro referendum “fever” becomes intense. This would also aid persuasion for Great Britain to enter the euro.
